Be Prepared

Life teaches us many lessons. As a young boy, I was an active Boy Scout – Cub, Wolf, Bear, and then Webelos (We'll Be Loyal Scouts). I never advanced past that level, but one very simple lesson learned in those formative years that has stayed with me happens to be the Boy Scout motto: Be Prepared.

Upon hearing the Scout motto, someone asked Scouting founder Robert Baden-Powell the inevitable follow-up question: prepared for what? “Why, for any old thing,” he replied. ¹ I can imagine he said it with a twinkle in his eye. In the long decades since my scouting years, I have slightly modified the adage to always be prepared. One could argue that Mr. Baden-Powell did not include “always” because it was implied that preparedness is an all-or-nothing proposition, but the additional emphasis has proven helpful to me.

What, you may be wondering, does all of this have to do with my investments? It's simple – like scouts, investors must always be prepared for any old thing the capital markets may present to them. We are entering the 108 ^th month of what now constitutes the second-longest business expansion in U.S. history, and seem to be at a bit of a crossroads. On the one hand, the sheer length of the current expansion would seem to suggest that it will be ending soon. On the other hand, the usual signs that would generally signal its end – high interest rates, high inflation, an aggressive Federal Reserve, high debt levels for companies and individuals, stock market euphoria and an over-heating economy – are noticeably absent to date.

So how are investors to simultaneously prepare for a business expansion and equity bull market that could continue while at the same time preparing for their inevitable end? It's all about making sure that your portfolio continues to be aligned with your financial plan – and that your financial plan continues to be aligned with your objectives and risk tolerance level. And that's where your Financial Advisor can help.

Action Plan:

1. Revisit Financial Plan and Asset Allocation. Consider sitting down with your Financial Advisor to review your portfolio’s current asset allocation – specifically its current targeted potential return and risk. Is it aligned with your financial plan? Are there opportunities to downshift into a less risky portfolio while still staying on track to pursue your financial goals? If so, this may be a prudent adjustment at this late stage of the current business expansion.
2. Rebalance Regularly. A portfolio's asset allocation (how much is in stocks, bonds, and other asset classes) determines its targeted potential return and risk level. As equity markets have substantially outperformed bond markets over the last eight years, what was a 60% equity/40% bond portfolio could easily have turned into an 80% equity/20% bond portfolio. If the original risk profile of your portfolio was appropriate, an 80% equity portfolio contains more risk than you signed up for. In this case, rebalancing your portfolio will require selling stocks and buying bonds in order to return it to its original risk level. It's important to note here that we regularly rebalance the portfolios in our Asset Management Solutions (AMS) and Investment Management Account (IMA) programs.
3. Review Short-Term Financial Goals. You may also want to specifically discuss your short-term (less than three years) financial goals with your Financial Advisor. What are they? How much money will you need to satisfy those goals (your child's wedding, buying a condo, grandchild's college tuition, etc.)? Do you have shorter-term, more liquid investments, such as cash or short-term bonds set aside and allocated towards those goals? Ask yourself if a downturn in the equity markets would negatively affect your short-term goals. If the answer is “yes”, you may want to consider adjusting your portfolio.

It's always a great idea to meet with your Financial Advisor regularly in all types of market conditions, but especially so in times of uncertainty. Only by reviewing your financial plan and ensuring that your portfolio remains aligned with your objectives can your Advisor ensure that you will be prepared for any old thing that comes around. And that's what personal financial coaching is all about.

Thanks for taking a look.

John Weitzer, CFA

Chief Investment Officer

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The information in this report was prepared by John Weitzer, Chief Investment Officer of First Command. Opinions represent First Command’s opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. First Command does not undertake to advise you of any change in its opinions or the information contained in this report. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Should you require investment advice, please consult with your financial advisor. Risk is inherent in the market. Past performance does not guarantee future results. Your investment may be worth more or less than its original cost. Your investment returns will be affected by investment expenses, fees, taxes and other costs.

Diversification, asset allocation and portfolio rebalancing do not guarantee a profit or protect against a loss in a declining market. They are methods used to help manage risk. Investment returns and principal value will fluctuate and your investment, when redeemed, may be worth more or less than its original cost. Sales charges and taxes may apply.

[1] https://blog.scoutingmagazine.org/2017/05/08/be-prepared-scout-motto-origin/.